Shinhan Financial Group is stepping up its non-life insurance business through the acquisition of Lotte Non-Life Insurance. The move is designed to narrow the gap with KB Financial Group by reinforcing its previously weak non-life insurance foundation, but it is expected to bring considerable burdens in post-acquisition capital expansion and profitability recovery.

According to the financial sector on the 14th, Shinhan Financial signed a Stock Purchase Agreement (SPA) the previous day to acquire a 77.04% stake in Lotte Non-Life from its largest shareholder, JKL Partners, for KRW 693.3 billion. Shinhan Financial plans to secure the remaining 22.96% stake as well through necessary procedures, including approval from financial authorities.

Based on this transaction price, the total equity value of Lotte Non-Life is estimated at approximately KRW 900 billion. However, the final acquisition amount may vary depending on the method and conditions for securing the remaining shares. This marks the first time in 7 years that Lotte Non-Life is getting a new owner since it was transferred from Lotte Group to private equity firm JKL Partners in 2019. At that time, JKL Partners acquired a 53.49% stake in Lotte Non-Life for KRW 373.4 billion and raised its ownership to 77.04% through a paid-in capital increase.

Since pushing for a sale starting in 2023, the transaction was prolonged due to price disagreements, causing the desired price—initially in the KRW 2 trillion range—to drop to around KRW 900 billion based on the total equity valuation of the current deal. The core background behind this acquisition is cited as the enhancement of Shinhan Financial's non-life insurance business competitiveness.

In the first half of this year, Shinhan Financial's net income stood at KRW 3.4427 trillion, trailing KB Financial's KRW 3.8846 trillion by KRW 441.9 billion. The performance gap in the non-life sector was particularly prominent. While KB Insurance posted a net income of KRW 478.8 billion in the first half, Shinhan EZ General Insurance recorded a net loss of KRW 18.2 billion.

The performance gap between the two non-life affiliates alone reached KRW 497 billion, exceeding the gap in the group's total net income. This is interpreted as a strategy to reinforce the previously vulnerable non-life business foundation. Lotte Non-Life secures approximately 3.34 million customers and a network of 7,000 insurance planners.

Coupled with a business base centered on long-term protection-type insurance, it is evaluated as capable of rapidly expanding Shinhan EZ General Insurance's insufficient business scale in a short period. The positive factor is that Lotte Non-Life's recent performance and capital soundness indicators are showing some improvement. Lotte Non-Life succeeded in turning a quarterly profit in the second quarter of this year, recording an operating profit of KRW 3.1 billion and a net profit of KRW 1.3 billion.

Insurance operating profit also maintained a level similar to the previous quarter at KRW 26.5 billion. Investment profit and loss recorded a deficit of KRW 23.5 billion, but the deficit shrank by KRW 32.2 billion compared to the previous quarter. Capital soundness indicators also improved. The tentative basic capital K-ICS (Korea-Insurance Capital Standard) ratio at the end of the second quarter stood at -5.4%, improving by 16.0 percentage points (p) from the previous quarter.

Basic capital similarly improved from -KRW 350.9 billion to -KRW 91.0 billion over the same period, while the total K-ICS ratio recorded 161.9%. However, given that the basic capital ratio remains negative, additional capital expansion following the acquisition remains a task to be addressed.

After incorporating Lotte Non-Life as a wholly owned subsidiary and integrating it with Shinhan EZ General Insurance, Shinhan Financial presented a target of generating group profits of over KRW 120 billion within 3 years. To achieve this, it plans to inject KRW 300 billion into the capital increase of Shinhan EZ General Insurance and increase basic capital by approximately KRW 760.6 billion through effects related to surrender value reserves resulting from Lotte Non-Life's capital reduction.

However, if Lotte Non-Life transitions the exception model applied to non-low-surrender insurance to the principle model, basic capital is expected to decrease by about KRW 310 billion, limiting the net effective improvement scale to approximately KRW 450 billion. Securities firms point out that additional capital expansion may still be necessary despite Shinhan Financial's capital improvement plans.

To meet the final standard of 50% for the basic capital K-ICS regulation to be introduced starting next year, it is estimated that about KRW 1.2 trillion in basic capital will be needed before applying the transitional measures. Even reflecting the capital improvement effects pursued by Shinhan Financial, analysis suggests that an additional basic capital of approximately KRW 740 billion before applying transitional measures, and about KRW 49 billion after application, may be required.

Profitability recovery is also a variable. Lotte Non-Life's Insurance Contract Margin (CSM) at the end of the second quarter is approximately KRW 2.2 trillion, but it is expected to decrease to about KRW 1.2 trillion once changes in accounting models and the realization of discount rates are reflected. As Shinhan EZ General Insurance also recorded a deficit in the first half, it is difficult for the integration of the two companies to immediately translate into an increase in group profits.

The success of this acquisition is evaluated as depending on Lotte Non-Life's profit normalization and the improvement of the group's Return on Equity (ROE) over the next 2 to 3 years. An official from the financial sector commented, "Although Lotte Non-Life's sale price is significantly lower than initial expectations, considering the capital expansion required post-acquisition, it is difficult to say that Shinhan Financial's burden is light." They added, "However, given that it has secured a previously lacking non-life insurance base in one stroke, it is meaningful, and what matters moving forward is how quickly it can secure profitability matching the capital invested."

[ⓒ Global Economic Times. 무단전재-재배포 금지]